It is not nice to tease the bond junkies especially when they are
holding the fate of the economy in their hands. Greenspan talked
a big bluff and said all the right things but his words fell on
deaf ears. The bond bulls ran for cover despite threats of lower
rates ahead.

Dow Chart - Daily

Nasdaq Chart - Daily

Economic reports were good but traders did not applaud. The weekly
Chain Store Sales rocketed +0.9% for the week ended July 12th and
produced the largest back to back weekly gains since April. Summer
weather and steep discounting reportedly produced the gains. Stores
saw increased traffic as rains dried up in the eastern part of the
country.

The Monthly Retail Sales jumped +0.5% and was inline with estimates
despite a dip in auto sales. Some employers have already started
reducing tax deductions for workers and that money is finding its
way into the stores. While that may be the case on a very limited
basis the far more likely reason was the current weather and the
massive discounting to blow out Easter, Mothers Day and Fathers
Day goods that were not sold due to bad weather then.

The NY Empire State Manufacturing Survey posted the third monthly
consecutive gain and was strongly positive at 22.6. That was the
official spin on the headline number. That headline number actually
fell from 27.6 in June and inventories, back orders, delivery times,
prices received and employment all dropped into negative territory.
Unfilled order backlog fell to -5.7 from +2.6. Delivery fell to
-6.4 from +3.1. Employment fell to -8.6 from zero. Prices received,
you know that "unwelcomed decrease in inflation" fell to -14 as
pricing power continues to erode. The six-month outlook began to
erode as well with a drop to 52.5 from 58.9. I am not saying this
was a negative report but it was not as positive as the talking
heads tried to spin it.

The biggest economic news for the day was not a report but a speech
by Greenspan to Congress. The event was not without controversy and
a major amount of grandstanding. Greenspan touted the numerous ways
he felt the economy was poised to recover and the panel pointed out
the numerous things he had done wrong and why the plan would fail.
It was not your regular "praise meeting" full of "we have the utmost
respect for you" comments. Panel members continually pounded him
with verbal assaults so severe that other members publicly
apologized for their behavior. Yes, it is an election year and
Alan was forced to be the fall guy for the reelection crowd.

Alan said the FOMC was prepared to make substantial additional rate
cuts to keep the economy on track and to use other weapons at their
disposal for a long time to come. Unfortunately nobody believed him.
With the Fed funds rate at 1.00% he admitted that any additional
rate cuts could hurt interest rate sensitive businesses like money
market funds as well as destroy retirement investments for millions
of people who depend on CDs and short term interest bearing accounts
for income. Alan did not win any friends there and the bond junkies
laughed behind his back at what they considered an obvious bluff.

He also shot himself in the foot on the threat to use other weapons
after he closed the speech with "However, given the now highly
stimulative stance of monetary and fiscal policy and well-anchored
inflation expectations, the Committee concluded that economic
fundamentals are such that situations requiring special policy
actions are most unlikely to arise." If the situation is most
unlikely to arise then the bond market promptly ignored it and
rushed to sell their bonds. The Ten year sold off a full two points
and the 30-year a full three points. Yields on the 30-year nearly
hit 5% and the ten year hit 3.968%. The interest sensitive stocks
got killed with home builders selling off substantially along with
utilities. It was a rout as bonds hit three-month lows and gave
no indications that anything was going to change. Suddenly the
Fed's carefully crafted plan to keep interest rates low simply
disintegrated before their eyes. With refinancing applications
falling -22% last week and rates soaring this week there could be
an even bigger drop off ahead. The refi consumer as the pillar of
the recovering economy has died. It is now time for the business
community to step up to the table or the winter may begin early.

Adding to the concern was the newly released budget numbers showing
the deficit for 2003 to be -$455 billion and 2004 to be -$475
billion. Oh, did you know that the 2004 numbers do not include any
spending for Iraq? Considering it is currently costing $4 billion
a month and the best estimates are for another 2-3 years then we
could easily add $50 billion to every estimate for years. That
puts us well over $500 billion for 2004 without trying. Greenspan
was asked if we could tax cut ourselves back into prosperity and
I do not need to tell you the answer. Long-term investors are very
worried that this massive debt load coupled with a sputtering
economy could combine to squelch the recovery before it starts.
(just reporting here, not expressing an opinion) If the economy
was firing on all cylinders then deficit spending would add to the
fuel and power the rocket. The bottom line was bond junkies running
for cover and selling bonds with both hands.

This is normally good for the market if that cash is headed for
equities but there was no cash flowing in that direction today.
The problem it appears is the carry trade. That means hedge funds,
mutual funds, large corporate borrowers, etc, borrow short term
money from various sources like Japan where interest rates are
near zero and buying long term bonds in the U.S. That works well
as long as bonds are going up or are stable but with bonds falling
through the floor those trades have to be unwound quickly. The
key level according to the bond junkies is a 4.0% yield on the
ten year. Should that level be broken the amount of debt that
would begin to unwind could be over a trillion dollars. This
massive fund shift could cause ever escalating rates to the point
where they spiral out of control and begin to feed on themselves.
What a wonderful web of interrelated dependencies we feed on.

The point here is the Fed has lost control and they are at the
mercy of the markets. They really do not have any bullets left in
their gun and the bluff is not working. Greenspan will have an
opportunity to try and improve his delivery and restate his case
when he repeats his testimony to the Senate. Don't look for any
new facts to appear but the delivery should be drastically
different. He will have seen the bond drop today and be trying
to grasp at any straw to recover control. Going to be an uphill
task.

The earnings week is in full swing with over 25% of the S&P
announcing earnings this week. The companies already announced
have run the gamut of massive charges from companies like Boeing,
massive losses from derivatives like FNM and massive warnings like
Lucent but what else is new. Add in the funny numbers like the ETN
gains from tax rate changes and just plain earnings misses from
companies like RMBS. It is not your normal earnings season but
after the bell today we saw the first major tech try to steal
some positive headlines.

INTC beat the street by a penny and edged slightly past revenue
estimates. They raised their gross margin estimates for the
remainder of the year due to product mix and the slow demise of
the AMD competition. BUT, after a rocket ramp in the futures after
the announcement, Andy Bryant, the Intel spin doctor appeared on
CNBC and said it was not a recovery yet. He said it was more like
a return to normalcy where the tech improvements over the last
two years were starting to pay off in profits. Intel stock paused
for a few moments and then soared ahead as shorts raced to cover.
The futures however rolled over immediately and have been drifting
down ever since. Remember the good news from YHOO and JNPR were
met with selling as the good news was already priced in. The Intel
news may have surprised those that were expecting a normal 2Q miss
as has occurred in the past and that lack of a miss is powering
the INTC stock.

Also hurting the after hours trading were misses or warnings from
LU, TER, SCHL, PHTN, ELON, IKON, CDN, PVSW and Motorola. Several
companies met or slightly beat estimates and guided inline with
estimates. Inline will get you nothing in a market that is priced
to perfection. If you cannot guide higher and beat then you are
toast. Wait, YHOO and JNPR beat and guided higher and they were
still clobbered. Get the point?

Besides an instant replay of Greenspan on Wednesday we will get
the CPI, Business Inventories, Industrial Production, Housing
Index and Mortgage Survey. All the majors will be out before the
market opens and should provide plenty of economic fodder for the
bond bulls to chew on instead of Greenspan. The big gun for
tomorrow is IBM after the close. That could be one more nail in
the coffin if they do not blow the doors off their estimates.
Offsetting the INTC gains in the Dow will be weakness in Citigroup
after they announced at the close a $6 billion buy of Sears
troubled credit card division. C was trading down after hours.
Also, MO is still under pressure after an Illinois court said the
previous court was in error when it changed the bond requirement.

The markets are poised to run but the direction is unclear. It
was announced today that the recent "fat finger" trades in the
Dow and S&P futures were real trades and were not errors after all.
This is a sobering thought. The volume of trades required to push
the Dow futures to near 8600 last week and the S&P to 990 on Monday
are huge. These are normally dealt out in small doses and the
multiple large sell orders hitting the market all at once have
scared many traders out of taking long positions. This undercurrent
of uncertainty right at the time that the market normally peaks in
July is giving added influence to the dance with the Fed.

I have talked about it for several weeks now and the time is at
hand. This is the week that would typically see the July peak and
the beginning of the July slide. Once IBM, MSFT and the other 25%
of the S&P companies announce this week the earnings outcome for
all companies will be known. There will be no reason to wait
around for the next surprise because there will be no more
surprises. Sure some will beat and some will miss but historically
the majority of the good earnings come this week from the giant
blue chips. That leaves the rest of the pack bringing up the rear.

If you are watching a marathon with tens of thousands of runners
once the leaders cross the finish line the excitement fades. You
may still have a friend that you are waiting for buried deep in
the pack but the rest of the faces become a blur once the leaders
break the tape and draw the crowd of reporters. All attention will
be on INTC, IBM and MSFT and then bonds and then the second half
economy. If the bulls are going to pull a July rally out of their
hat then this is the week to do it. If they can't do it this week
then it is all over but the shouting. The next ramp job typically
begins in August and that gives traders a couple weeks or more to
shuffle portfolios based on the July results and guidance for the
remainder of the year. Did I mention this is option expiration
week as well?